Warning from the US Bond

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rickets's picture
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Warning from the US Bond

I dont want to sound any false alarms, but for some reason the US Bond rally is not getting much attention.  People should be very aware that the US T Bond is having one of the biggest 1 and 2 week rallies in history - - and that is clearly a warning sign.  It might lead to nothing, but certainly causes me to be quite concerned that there are some major issues in the financial markets brewing.

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Re: Warning from the US Bond
rickets wrote:

I dont want to sound any false alarms, but for some reason the US Bond rally is not getting much attention.  People should be very aware that the US T Bond is having one of the biggest 1 and 2 week rallies in history - - and that is clearly a warning sign.  It might lead to nothing, but certainly causes me to be quite concerned that there are some major issues in the financial markets brewing.

Thanks so much Rickets. Could you expand a bit on this, tell us why it's a warning sign?

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Re: Warning from the US Bond

Usually a move like this in the bond would have very clear news backing it.  Something like a Euro implosion or a Lehman failure...etc.  Whats interesting is that there is not anything shockingly new to trigger this move...just a ever creeping worsening in almost everything financial/economic.  Perhaps its some straws breaking the camels back finally?  Perhaps everyone is on vacation and so news flow is light and no one is taking dramatic action?

I guess whats really interesting to me is that equities have not reacted.  Given this move in the bond, you would normally see a HUGE drop in equities.  So, either the bond or equity prices are "wrong" or something very bizzare is up.  I am fearful that there is some major liquidity issue happening under the surface that could result in a very near term shock.  These types of moves are no where near normal.

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Re: Warning from the US Bond

Thanks Rickets!  I'm not a financial pro so your info is much appreciated.  I'd like to hear what CM or FarmB would have to say about this action.  Or Erik if he's around.  

Rickets, why would a lack of liquidity move the bond market like this?  I can understand liquidity and movement in equities, but I don't understand the correlation of liquidity and the bond market.  Or maybe I'm just going brain dead and it's just going past my pea brain for some odd reason.

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Re: Warning from the US Bond

Thanks Rickets!  I'm not a financial pro so your info is much appreciated.  I'd like to hear what CM or FarmB would have to say about this action.  Or Erik if he's around.

+1

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Re: Warning from the US Bond

Rickets, I agree 100%.  Something ain't right.  Could have something to do with this:

http://www.calculatedriskblog.com/2010/08/european-bond-spreads-rising-again.html

Thursday, August 19, 2010

European Bond Spreads: Rising Again

by CalculatedRisk on 8/19/2010 06:04:00 PM

Here is a look at European bond spreads from the Atlanta Fed weekly Financial Highlights released today (graph as of Aug 18th):

Euro Bond Spreads Click on graph for larger image in new window.

From the Atlanta Fed:

Peripheral European bond spreads over German bonds remain volatile and elevated.

Since August 9, the 10-year Greece-to-German bond spread has risen 93 basis points (bps) through August 17. Likewise, Portugal’s bond spreads rose 32 bps, Italy’s rose 16 bps, Spain’s rose 21 bps, and Ireland’s rose 42 bps during the same period.

As of today, the Greece-to-German spread has widened to 834 bps (peaked at 963 bps in May) and the Ireland-to-German spread has increased to 293 bps (peaked at 306 bps in May).

The spreads are below the peak of the crisis in May, but above the level when the stress test results were released.

Note: The Atlanta Fed data is a couple days old. Nemo has links to the current data on the sidebar of his site.

Volume in equities has been among ther lowest all year.  That's normal for this time of year, which could be why reaction in equities is both delayed and muted.  I expect more and stronger down days on much higher volume in the days to come.
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Re: Warning from the US Bond

Thanks, Rickets, for posting your concerns about what the bond market is telling us.  

I have no way of knowing but here is one possibility for the sharp fall in bond yields:

http://usawatchdog.com/why-is-the-u-s-government-protecting-bp/

Comments?

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Re: Warning from the US Bond

Logan - I meant to say that when the bond has moved like this in the past its out of fear of a liquidity crisis of some kind.  That might be some massive counter party risk that many are anticipating (like LEH/BSC/GREECE default issues). 

Farmer - I agree thats gotta be a huge factor.  Whats interesting is the the Euro, while taking some heat today (going down), its dead in the middle of its 3 month range.  So, its not at a crisis point while the bonds are indicating a crisis is upon us.  Equities - everyone is on vacation sure - - but there seems to be no risk being perceived here - - -defined either by the VIX or by the equity prices. 

Very interesting. 

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Re: Warning from the US Bond

Good observation, rickets. The yield on the 5-year T-note is within a couple of tenths of its Dec. 2008 crisis lows. Chart:

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=fvx&sid=0&o_symb=fvx&freq=1&time=9

Several theories could be advanced to explain the pathological drop in yields -- credit fears, deflation fears, etc. We should recall that the Treasury bond market is characterized by a single monopoly issuer, and official buyers -- the Federal Reserve (which is in the market buying this week) as well as foreign official buyers. Therefore, it can't necessary be assumed to be a free-market price-discovery mechanism.

Although the Fed's buying is intended to be expansionary (it adds reserves which banks can lend out, if they choose to), to the extent that it pushes down yields, it inadvertently sends a deflationary message. If this message is widely believed, it can lead to a self-reinforcing downward spiral and a safe-harbor panic trade into Treasurys, as every other security becomes suspect on credit-risk grounds.

This vicious cycle needs to be stopped. I will have to more to say about this. But first let me get on the Batphone to Benny. Smile

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Re: Warning from the US Bond

For the visual-dominated brainset, here's a really cool 3d chart from a zero-hedge article a few days ago that puts the "flat" into "flattenning".  Not 100% sure what this portends, but to me it screams deflation, and major liquidity run directly ahead.  As Rickets pointed out, these are unprecedented yields and an unprecedented bull run in bonds. 

http://www.zerohedge.com/article/visualizing-past-treasury-yield-curve-and-deconstructing-great-confusion-surrounding-its-fut 

 

Visualizing The Past Of The Treasury Yield Curve, And Deconstructing The Great Confusion Surrounding Its Future

The chart below shows the UST yield curve over the past 20 years: as is more than obvious, every single point left of the 10 Year is at record tights. The only question on everyone's lips is where do we go from here. And that is where the confusion really hits.

 

 

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Re: Warning from the US Bond

Short term goal: lower interest rates.....long term goal: crash the bond market?

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Re: Warning from the US Bond

Cool Graph FB!  

Thanks guys/gals(?) for the input/info!  Liquidity crisis HERE WE COME!  

Do you guys know how lucky we are to be living in times like these???!!???  Awesome!  

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Re: Warning from the US Bond
Farmer Brown wrote:

For the visual-dominated brainset, here's a really cool 3d chart from a zero-hedge article a few days ago that puts the "flat" into "flattenning".  Not 100% sure what this portends, but to me it screams deflation, and major liquidity run directly ahead.  As Rickets pointed out, these are unprecedented yields and an unprecedented bull run in bonds. 

http://www.zerohedge.com/article/visualizing-past-treasury-yield-curve-and-deconstructing-great-confusion-surrounding-its-fut 

Nice chart-porn, Farmer! 'Visual dominated' -- that's me. Thanks for the NLP awareness! For the tactile types, we can translate this chart into a foot massage. Wink

For the first time ever, not only is the overnight (Fed-administered) interest rate at zero, but also the 'mashed-down' portion of the yield curve is spreading to the 1, 2 and 3-year maturities. 

This is spectacularly pathological. Low interest rates make borrowing cheaper, but the flip side is that they cut the interest income of savers. If net loans outstanding are declining, then the income-lowering effect dominates the cheap-borrowing effect.

Now, on other web sites, I'm starting to see bizarre, elaborate rationalizations for why these extreme Treasury prices are not only justified ... but sustainable. Don't read this -- it will poison your mind -- but here is one example, for those who can gird their mental loins against the deranging contagion of alien-universe, off-planet agitprop:

http://pragcap.com/the-myth-of-the-great-bond-bubble

Since late 2008, I've been saying that the authorities' only recovery strategy is to create a monstrous, sky-shadowing Bubble III. Now I realize that it's crept up on me entirely unawares -- Bubble III is the Treasury market. A whole new crop of shiny synthetic-suited, Kool-Aid-guzzling true believers -- who like Kalahari-desert exotic plants, watered by once-a-decade rains, can eke out a marginal existence on fractional interest yields -- have materialized to praise, worship and ululate this bizarre phenomenon.

I am terrified beyond words. BEAM ME UP, SCOTTY! There's no redeemable currencies down here! Surprised

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Re: Warning from the US Bond

So MH, what happens next?  I've been reading and seeing the same in regards to the attitude that we can keep Treasuries at these levels (or lower/what that means is beyond me) forever!  CNBC/S was talking about the sustainability of this phenomenon for years!  Crazy!

They've been talking about a Treasury bubble for quite some time and now it's come to roost.  How long is it sustainable, what will happen when this bursts?  Is there any way for the avg. person to profit off of it?  Thoughts?

machinehead wrote:
Farmer Brown wrote:

For the visual-dominated brainset, here's a really cool 3d chart from a zero-hedge article a few days ago that puts the "flat" into "flattenning".  Not 100% sure what this portends, but to me it screams deflation, and major liquidity run directly ahead.  As Rickets pointed out, these are unprecedented yields and an unprecedented bull run in bonds. 

http://www.zerohedge.com/article/visualizing-past-treasury-yield-curve-and-deconstructing-great-confusion-surrounding-its-fut 

Nice chart-porn, Farmer! 'Visual dominated' -- that's me. Thanks for the NLP awareness! For the tactile types, we can translate this chart into a foot massage. Wink

For the first time ever, not only is the overnight (Fed-administered) interest rate at zero, but also the 'mashed-down' portion of the yield curve is spreading to the 1, 2 and 3-year maturities. 

This is spectacularly pathological. Low interest rates make borrowing cheaper, but the flip side is that they cut the interest income of savers. If net loans outstanding are declining, then the income-lowering effect dominates the cheap-borrowing effect.

Now, on other web sites, I'm starting to see bizarre, elaborate rationalizations for why these extreme Treasury prices are not only justified ... but sustainable. Don't read this -- it will poison your mind -- but here is one example, for those who can gird their mental loins against the deranging contagion of alien-universe, off-planet agitprop:

http://pragcap.com/the-myth-of-the-great-bond-bubble

Since late 2008, I've been saying that the authorities' only recovery strategy is to create a monstrous, sky-shadowing Bubble III. Now I realize that it's crept up on me entirely unawares -- Bubble III is the Treasury market. A whole new crop of shiny synthetic-suited, Kool-Aid-guzzling true believers -- who like Kalahari-desert exotic plants, watered by once-a-decade rains, can eke out a marginal existence on fractional interest yields -- have materialized to praise, worship and ululate this bizarre phenomenon.

I am terrified beyond words. BEAM ME UP, SCOTTY! There's no redeemable currencies down here! Surprised

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Re: Warning from the US Bond
machinehead wrote:

A whole new crop of shiny synthetic-suited, Kool-Aid-guzzling true believers -- who like Kalahari-desert exotic plants, watered by once-a-decade rains, can eke out a marginal existence on fractional interest yields -- have materialized to praise, worship and ululate this bizarre phenomenon.

ROTFLMAO

But what about the old geezers in their shabby clothes, trying to sustain themselves in their golden years searching for those rich pastures of their youth for yield, where they can deploy what few resources they've managed to accumulate that are all that keeps the wolf from the door?

Retirement portfolio: 27% Canadian equities, 35% fixed income,15% PM stocks, 15% PM bullion, 8% emerging market equities. Am I well balanced or do I have too much risk? Should I rollover into 1% corporate bonds as my fixed incomes matures? Any thoughts welcomed.

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Re: Warning from the US Bond

An article by Jeremy Siegel and Jeremy Schwartz in the WSJ seems to have brought the 'Bond Bubble' controversy to a boil. Excerpt:

Investors, disenchanted with the stock market, have been pouring money into bond funds, and Treasury bonds have been among their favorites. The Investment Company Institute reports that from January 2008 through June 2010, outflows from equity funds totaled $232 billion while bond funds have seen a massive $559 billion of inflows.

http://online.wsj.com/article/NA_WSJ_PUB:SB10001424052748704407804575425384002846058.html

Sustained outflows from equity funds are highly unusual, as are huge inflows into bond funds. In the past, such events nearly always had contrarian implications (that is, one should do the opposite). The two Jeremys present stocks and bonds as binary alternatives, but fail to consider the other heavy-hitter asset class, real estate. Plenty of REITs and REIT ETFs are available, with generous dividends.

Barry Ritholtz posted this Bloomberg chart, showing that the total return on 10-year T-notes in the past decade has rivaled that of the S&P 500 during the Roaring Nineties:

http://www.ritholtz.com/blog/2010/08/do-us-bonds-resemble-dot-com-stocks/

Japanese government bonds (JGBs) arguably are even bubblier than US Treasurys. Ten-year JGB futures hit a 7-year high last week, as the yield fell under 1%.

Yields under 1% on any major asset class are indicative of Bubble conditions. Both the Nasdaq and the Dow Transports yielded under 1% at the end of 1999. A slow-motion crash ensued into October 2002. 

Now JGBs and U.S. TIPS (Treasury Inflation Protected Securities) yield under 1%. Ignore this at your peril. Upside is limited; downside is huge. Why? Because if debt-choked governments can't succeed in inflating (which will smash bond prices), then eventually they will default (which will smash bond prices).

As Paul Simon used to sing, 'Any way you look at it, you lose.' 

But Bubble believers always imagine they'll sell to the 'last fool.' If you're at Wall Street's poker table and you don't know who the last fool is -- IT'S YOU!

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Re: Warning from the US Bond

A New York Times graphic provides perspective on the contrarian implications of mutual fund inflows:

http://www.nytimes.com/2010/08/22/business/22invest.html?pagewanted=2&_r=1&hp

In the equity fund graphic, net withdrawals in 1988, 2002 and 2008 marked buying opportunities for stock rallies. By contrast, the record spike of buying in 2000 came just before a punishing bear market.

Likewise, net withdrawals from bond funds in 1994, 2000 and 2004 marked low points in bond prices, within an ongoing secular rally. All three years were excellent opportunities to go against the crowd and buy.

By contrast, the monster spikes in bond fund purchases in 2009 and 2010 dwarf the size of equity fund purchases during the tech bubble frenzy of 2000. Is this frantic crowd, buying low-yield assets at near-record high prices, going to be correct for a change? Only if 'this time is different.' 

Wink

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Re: Warning from the US Bond

I would ascribe a lot of the "bond bubble" to demographics.  Boomers are not just a US phenom - it is global - at least in the developed world.  You have a whole bunch of people who are close enough to the retirement horizon to begin to see the valley beyond.  When you're 30, who cares.  When you're 40, you care but aren't doing a lot about it.  Oh but hit 50 and you start thinking "I bettter "safely" store some nuts for Winter".  The "faith" in Wall Street has evaporated and the return of principal is no longer assumed let alone a positive return on principal.  What to do, what to do?  The short yeilds on cash are negligible which leads people further out the curve as well as encouraging a bit more risk taking in terms of corporate bonds and suckers being sold REITs by the same skanks that put them into JDSU at a post split $150.

It probably is a "bubble", but one I suspect that has some long legs.  In late 2007 the 2/10 spread was <.5% - there was virtually no reward for "long term". By early 2008 it had gapped to over 2% mostly by the short end yield dropping.  At this stage the bets that the Fed would raise rates at some point relatively "soon" lifted the 2 back to a spread of 1-1.5% for about 6 months.  Soon enough it was decided the Fed wasn't going to raise rates - forever and the spread returned to 2%+ and sticking pretty close to 2.5%. Will the short end rise and lift the long end?  Who knows, but I suspect that the 2/10 gap will close by a rising short end and a falling long end.

You want a "safe" return of something other than <1% that you can get from the bank?  Hello bond market.  I did an analysis  a year or two ago on the actual quantity of 10s and 30s out there,  It isn't much - perhaps less than 15% of the total debt, most of that 10s - the US is financed mostly short term.  The aging boomers having lived through the past decade are damn gun shy and will store what ever they have left in something that has liquidity (sorry Mr. Realtor) and "safety" with the best yield (income) possible.  Few will own gold - they know nothing about it and do not view it as money, but as a nice shiny metal that looks good around your neck.

I only see this trend increasing as we are just rolling the first of the boomers off the stage and there's a long line behind them.  The boomers had their greed and now the fear sets in. IMO the stock market has a long ways to drop as the retail support dries up.  Should the stock market really swoon (Goldman Sachs discretion of course) then I can't see anything but positives for the bonds

 

 

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Re: Warning from the US Bond
yobob1 wrote:

I would ascribe a lot of the "bond bubble" to demographics.  Boomers are not just a US phenom - it is global - at least in the developed world.  You have a whole bunch of people who are close enough to the retirement horizon to begin to see the valley beyond.  When you're 30, who cares.  When you're 40, you care but aren't doing a lot about it.  Oh but hit 50 and you start thinking "I bettter "safely" store some nuts for Winter".  The "faith" in Wall Street has evaporated and the return of principal is no longer assumed let alone a positive return on principal.  What to do, what to do?  The short yeilds on cash are negligible which leads people further out the curve as well as encouraging a bit more risk taking in terms of corporate bonds and suckers being sold REITs by the same skanks that put them into JDSU at a post split $150.

It probably is a "bubble", but one I suspect that has some long legs.  In late 2007 the 2/10 spread was <.5% - there was virtually no reward for "long term". By early 2008 it had gapped to over 2% mostly by the short end yield dropping.  At this stage the bets that the Fed would raise rates at some point relatively "soon" lifted the 2 back to a spread of 1-1.5% for about 6 months.  Soon enough it was decided the Fed wasn't going to raise rates - forever and the spread returned to 2%+ and sticking pretty close to 2.5%. Will the short end rise and lift the long end?  Who knows, but I suspect that the 2/10 gap will close by a rising short end and a falling long end.

You want a "safe" return of something other than <1% that you can get from the bank?  Hello bond market.  I did an analysis  a year or two ago on the actual quantity of 10s and 30s out there,  It isn't much - perhaps less than 15% of the total debt, most of that 10s - the US is financed mostly short term.  The aging boomers having lived through the past decade are damn gun shy and will store what ever they have left in something that has liquidity (sorry Mr. Realtor) and "safety" with the best yield (income) possible.  Few will own gold - they know nothing about it and do not view it as money, but as a nice shiny metal that looks good around your neck.

I only see this trend increasing as we are just rolling the first of the boomers off the stage and there's a long line behind them.  The boomers had their greed and now the fear sets in. IMO the stock market has a long ways to drop as the retail support dries up.  Should the stock market really swoon (Goldman Sachs discretion of course) then I can't see anything but positives for the bonds

 

 

Yobob, there is  low level panic among the 50+ crowd, granted, but this should support bullion and drive the price higher.  Real estate is the loathed investment right now, so probably a good time to look at it.  An equity REIT could take advantage of low housing prices in stronger neighbourhoods, with less drastic employment pictures and deliver some decent yields. The rental market is getting hammered, too, but not to the same degree as most other asset classes. As long as the economy doesn't completely collapse, rental market will retain some kind of value.

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Re: Warning from the US Bond
yobob1 wrote:

I would ascribe a lot of the "bond bubble" to demographics.  Boomers are not just a US phenom - it is global - at least in the developed world.  You have a whole bunch of people who are close enough to the retirement horizon to begin to see the valley beyond.  When you're 30, who cares.  When you're 40, you care but aren't doing a lot about it.  Oh but hit 50 and you start thinking "I bettter "safely" store some nuts for Winter".  The "faith" in Wall Street has evaporated and the return of principal is no longer assumed let alone a positive return on principal.  What to do, what to do?  The short yeilds on cash are negligible which leads people further out the curve as well as encouraging a bit more risk taking in terms of corporate bonds and suckers being sold REITs by the same skanks that put them into JDSU at a post split $150.

It probably is a "bubble", but one I suspect that has some long legs.  In late 2007 the 2/10 spread was <.5% - there was virtually no reward for "long term". By early 2008 it had gapped to over 2% mostly by the short end yield dropping.  At this stage the bets that the Fed would raise rates at some point relatively "soon" lifted the 2 back to a spread of 1-1.5% for about 6 months.  Soon enough it was decided the Fed wasn't going to raise rates - forever and the spread returned to 2%+ and sticking pretty close to 2.5%. Will the short end rise and lift the long end?  Who knows, but I suspect that the 2/10 gap will close by a rising short end and a falling long end.

You want a "safe" return of something other than <1% that you can get from the bank?  Hello bond market.  I did an analysis  a year or two ago on the actual quantity of 10s and 30s out there,  It isn't much - perhaps less than 15% of the total debt, most of that 10s - the US is financed mostly short term.  The aging boomers having lived through the past decade are damn gun shy and will store what ever they have left in something that has liquidity (sorry Mr. Realtor) and "safety" with the best yield (income) possible.  Few will own gold - they know nothing about it and do not view it as money, but as a nice shiny metal that looks good around your neck.

I only see this trend increasing as we are just rolling the first of the boomers off the stage and there's a long line behind them.  The boomers had their greed and now the fear sets in. IMO the stock market has a long ways to drop as the retail support dries up.  Should the stock market really swoon (Goldman Sachs discretion of course) then I can't see anything but positives for the bonds

Sorry, but I do not think global bond markets are being driven by 50+ yr olds putting what they have into long term bonds.  The players are banks, corporations, insurance companies, and institutional investors, including, I would suspect, pension funds. 

Current economic reality, due to debt saturation, is like a dampener that has been placed on risk-taking.  Nobody wants to expand, invest, or lend.  

Banks do not have anyone credit-worthy to lend to and those reserves have to go somewhere.  Corporations do not have any need to expand capacity and those mountains of cash must go somewhere.  Insurance and pension funds are not touching equities and so are left with mostly bonds.  This all means there is one and only one other place for all this liquidity to go, and that's the bond market. 

Where we go from here, I have no idea.  Recent Sentiment Index data show 98% bond bulls, which is second only to the December 2008 reading of 99%.  Sentiment extremes almost always indicate reversals ahead, so I wouldn't be surprised by a downward correction in the near future.  But that's short-term.  Long-term, it seems we have a global liquidity squeeze into bonds and out of equities.  Equity volume has been laughable - bond volume obviously not with lower yields and no failed auctions.

If the bull market is to continue, we should see increasing spreads between government bonds and corporate bonds.  Then, between safe government bonds and safer government bonds.  Take a look at 1930-1935 bond prices.  Very many, including ex-US gov bonds, fell out of bed and wiped people out,  That's what deflation does - assets get wiped out except for the very top tier which everyone tries to squeeze into.

 

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Re: Warning from the US Bond
agitating prop wrote:

 

Yobob, there is  low level panic among the 50+ crowd, granted, but this should support bullion and drive the price higher.  Real estate is the loathed investment right now, so probably a good time to look at it.  An equity REIT could take advantage of low housing prices in stronger neighbourhoods, with less drastic employment pictures and deliver some decent yields. The rental market is getting hammered, too, but not to the same degree as most other asset classes. As long as the economy doesn't completely collapse, rental market will retain some kind of value.

The percentage of the population that is gold oriented is woefully small.  I would be shocked if 10% of the households own a single coin.  It is more likely <5%. Of those how many "already bought" and are waiting for the $5,000 price?  How many are putting money into gold at these prices? Heck, a month of unemployment checks will buy little more than a single ounce.

IMO real estate is far, far from a bottom.  I look at the inventory out there in all classes, the nearly 20M vacant homes, the high vacancy rates in rentals, and the amount of REO that hasn't come to the market - I don't see any bottoms. Couple that with no signs foreclosures have slowed significantly (again other than interventions slowing the process) and the prospects that the economy is about to do a another major nose dive and again I see nothing but more inventory in the pipe. We've had massive intervention in the residential markets which likely sucked up the last possible buyers out there.  All you have to do is look at the wildly optimistic sales numbers from the NRA and the Govt. which are at all time lows and you can see that sales are not happening in any number close to being able to absorb the existing inventory let alone the pile of new inventory coming from the the negative am loans (peak in 2011) plus those who simply can't hang on due to no /insufficient income.

The commercial / retail space market is just as bad and continues to worsen.  There was simply way too much stuff built - most of it financed by the local and regional banks which is why the FDIC is shutting down banks as fast as they can muster the manpower to do so.  There are close to 800 "troubled" banks on their list - there's likely at least as many who are as "troubled" but haven't hit the radar screen just yet.

IMO we have started into a strong depression that cannot be "cured" by the Fed, the Govt or All The King's Horses and Men.

I'm not arguing that anyone should buy bonds, houses, stocks or gold.  Most of the people on this forum and others, are not your typical household - we are a very small fragment of the population.  You really have to try and look at things form the perspective of J6P and what Joe is seeing has him scared.  Joe is also a recovering shopaholic trying to convert to a frugal - they won't be back shopping till they drop in this generation or possibly the next.  The debt aversion "hangover" from the Great Depression lasted well into the next generation. Not a lot of people fully grasp the social change that has and continues to occur.

 

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Re: Warning from the US Bond

yobob1,

I couldn't agree with you more.  Very few people own any significant quantities of gold despite it being a commonplace store of wealth on this forum.  Similarly, I think there's significantly more downside to the real estate market, both residential and commercial.  We are in a depression, and heading deeper in and there's no way around it except through it.  I speak to many different people every day and most of them have no idea of the full ramifications of what is transpiring and what is to come. 

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yobob1
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Re: Warning from the US Bond
Farmer Brown wrote:

 

Sorry, but I do not think global bond markets are being driven by 50+ yr olds putting what they have into long term bonds.  The players are banks, corporations, insurance companies, and institutional investors, including, I would suspect, pension funds. 

Current economic reality, due to debt saturation, is like a dampener that has been placed on risk-taking.  Nobody wants to expand, invest, or lend.  

Banks do not have anyone credit-worthy to lend to and those reserves have to go somewhere.  Corporations do not have any need to expand capacity and those mountains of cash must go somewhere.  Insurance and pension funds are not touching equities and so are left with mostly bonds.  This all means there is one and only one other place for all this liquidity to go, and that's the bond market. 

Where we go from here, I have no idea.  Recent Sentiment Index data show 98% bond bulls, which is second only to the December 2008 reading of 99%.  Sentiment extremes almost always indicate reversals ahead, so I wouldn't be surprised by a downward correction in the near future.  But that's short-term.  Long-term, it seems we have a global liquidity squeeze into bonds and out of equities.  Equity volume has been laughable - bond volume obviously not with lower yields and no failed auctions.

If the bull market is to continue, we should see increasing spreads between government bonds and corporate bonds.  Then, between safe government bonds and safer government bonds.  Take a look at 1930-1935 bond prices.  Very many, including ex-US gov bonds, fell out of bed and wiped people out,  That's what deflation does - assets get wiped out except for the very top tier which everyone tries to squeeze into.

 

We are beyond saturation in debt - we have managed to achieve super saturation by globally borrowing more than ever can be repaid from production.  Banks don't want (can't) to lend and credit worthy borrowers have no desire to borrow - they see no need for expansion because the economy sucks and it is about to get worse again.  Globally there is a massive over capacity of production and space that could take decades to burn off.

Like many things, change comes from the margins.  All those you mentioned have daily and longer term "need" for the bond market.  Many of those mentioned are buying on behalf of the 50+.  The shift from equities to bonds as a preferred investment may simply be adding enough pressure to move the markets. 

Corporations are not "cash rich" - a current popular myth propagated by Wank Street..  While they may have what appears to be a lot of cash - they have also been piling on debt.  Their balance sheets tell the tale.

I fully expect spreads to widen according to the "safety" factor.  That could happen either from the less safe dropping in price, the safest continuing to climb or a combination. 

"Sentiment extremes almost always indicate reversals ahead"  Naturally you can always expect reversals - the question is will it be a severe correction or simply a bump in the road - me thinks the latter.

 

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agitating prop
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Re: Warning from the US Bond
ao wrote:

yobob1,

I couldn't agree with you more.  Very few people own any significant quantities of gold despite it being a commonplace store of wealth on this forum.  Similarly, I think there's significantly more downside to the real estate market, both residential and commercial.  We are in a depression, and heading deeper in and there's no way around it except through it.  I speak to many different people every day and most of them have no idea of the full ramifications of what is transpiring and what is to come. 

The very reasons you state for spurning gold, could just as easily be used as a strong argument for purchasing it. There are vast amounts of cash stagnating, at best, in just about every asset class. Roving dispossessed bands of baby boomers, will eventually turn off their televisions and hit the streets, alert to any investment  tips from their own circle of friends and neighbours. It won't take them long to sniff out the teflon coated survivors of the greed pig out, and they'll be taking their pointers from that crowd.

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machinehead
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Re: Warning from the US Bond
yobob1 wrote:

Like many things, change comes from the margins.  All those [institutions] you mentioned have daily and longer term "need" for the bond market.  Many of those mentioned are buying on behalf of the 50+.  The shift from equities to bonds as a preferred investment may simply be adding enough pressure to move the markets. 

Agreed. Plus, Treasurys (the largest, most liquid portion of the bond market, which all spreads are priced off of) have unusual characteristics. On the sell side, there's a single monopoly issuer, the US government. On the buy side, there's official buying from a government-influenced entity, the Federal Reserve. Also, there's foreign official buying. And buying from banks, influenced by regulatory pressure and capital adequacy considerations. 

All of these factors point to a 'quasi-market' -- one where prices easily could be distorted, and probably (even without an overt intention) ARE being distorted by one-sided buying. 

After all, the mathematics of shorting bonds are unattractive. If you borrow and sell short a bond that yields 3%, you have to pay the 3% coupon to the owner until you buy it back. If the bond's price drops 3% in a year, you've only broken even. If its price drops by 6%, then after paying the 3% coupon, you've made 3% -- the same yield the bond offered. In other words, to successfully short bonds, you've got to be right, in a big way, and in a hurry. Long-term bond shorts, just like long-term stock shorts, have the deck stacked against them.

Given this background, it's easy to imagine how a quasi-market such as Treasurys could get caught up in a self-reinforcing spiral. Then you speak of investors 'needing' the bond market -- LOOK OUT! 

Plenty of homeowners 'needed' residential real estate to keep bubbling -- annual refis were paying their tuition, vacations, car leases and credit card bills. But just when you 'need' Ms. Market to keep handing you free money, she rudely yanks the rug out from under your feet, and you end up crawling across the floor looking for your broken teeth.

'Need' for a Bubble to keep Bubbling is an early warning of an impending train wreck. The comments on the WSJ's Siegel/Schwartz article about the Great American Bond Bubble are frightening. Not only are a majority critical, but also many are convinced that their view is the only possible outcome. Some don't even know what they're talking about -- one argues that you should never buy a bond over the par price. These fanatical bond bugs, touting their sure-thing investment, scare the bejeepers out of me. I need me a solid-gold billy club to ward them off.

Remember 1720 -- government-sponsored Bubbles are the most sweeping and catastrophic, because the object of speculation is defined as 'risk-free' by the state and its academic acolytes. Welcome to Bubble III! The best thing you can do is run like hell.

------------

Bubble I -- tech / telecom stocks (1995-2000)

Bubble II -- real estate (2001-2006)

Bubble III - Treasurys (2007-2011?)

 

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Johnny Oxygen
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Re: Warning from the US Bond

Bubble I -- tech / telecom stocks (1995-2000)

Bubble II -- real estate (2001-2006)

Bubble III - Treasurys (2007-2011?)

+1

Looks like its time to post this again:

 

The Nine Steps of Hyperinflation

 

1. BOOM. Markets rise. Creation of asset bubbles.

2. BUST: Market Crash. Inflation goes negative. Central Banks overreact and cut interest rates. Money injections.

3. BOND BOOM: Government debt balloons. Debt issuance soars.

4. STABILIZATION: Stocks and commodities recover. Bonds stabilize. Volatility declines.

YOU ARE HERE

5. BOND BUST: Inflation goes positive. Bond buyers pull out. Central Banks step in and buy bonds (Quantative Easing). This gradually crowds out and scares off real buyers.

6. CURRENCY CRISIS: Money flees inflated currency, at first a trickle then a flood.

7. INFLATION SOARS: Quantitive Easing. Currency weakness pushes prices. Inflation accelerates. Commodities rise. Inflation reaches pre-bust highs.

8. POINT of NO RETURN: Central Banks are slow to contract money supply. Government continues to spend more. Deficits continue to grow. Real economy is still slow. Prices spiral.

9. CURRENCY DESTRUCTION: Double digit inflation. Currency devaluation. Bond market crash. Inflation goes logarithmic. Confidence in money is destroyed. Eventually even monetary contraction will not help as demand for cash evaporates.

 

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machinehead
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Re: Warning from the US Bond

Here is a related spin about the yield curve (yobob alluded to this earlier), which one has to be cautious about:

A steep yield curve traditionally indicates economic growth as investors demand more compensation for the risk of faster inflation. A flatter yield curve signals contraction and little threat of inflation.

Though yields are hovering near record lows, the curve as measured by projections of the three-month Treasury bill rate to 10-year note yield suggest the economy will strengthen by about 1.14 percent over the next year, according to a July report from the Federal Reserve Bank of Cleveland.

The economy has never contracted with the difference between short- and long-term Treasury yields as wide as it is now. That gap, at 2.11 percentage points for 2- and 10-year notes, signals a 15.5 percent chance of a recession in the next year, according to the Federal Reserve Bank of Cleveland.

The difference between 2- and 10-year yields is up from negative 0.19 percentage point in December 2006, just before the economy began to shrink.

An inverted yield curve has twice failed to predict a recession -- in late 1966 and late 1998. The bears say bonds may be sending another “false positive.” With the Fed’s target rate for overnight loans between banks at a record low of zero to 0.25 percent, it may be impossible for long-term yields to fall below short-term debt.

http://noir.bloomberg.com/apps/news?pid=20601087&sid=awkbbZMeMbHk&pos=1

When the yield curve last inverted in Dec. 2006, the 2-year yield was around 4.7%, while the 10-year yielded 4.5%. Both yields were free to move in either direction.

But with the overnight rate near zero, and the 2-year at less than 0.5%, short rates have effectively reached the zero bound. We have to be cautious about interpreting the yield curve, when one or perhaps both ends of it are hitting constraints.

For instance: volatility climbs with maturity. T-bill prices hardly move at all, in their steady march from 99-plus at purchase to 100 at maturity. But T-bond prices are about two-thirds as volatile as stocks. In two years out of three, the long bond price is as likely to fall 9% as it is to rise 9% during the year. You can see an extreme example of its volatility in this graph, in which the bond price screams from 112 to over 140 in a couple of months:

Consequently, investors in longer-term bonds demand a 'volatility premium' to compensate them for price risk. It's hard to separate the volatility premium from other premia, such as those due to credit risk and inflation risk. Judging from TIPS, the current inflation premium is small, under 1%.

Thus, the current yield curve may be mostly a 'volatility premium' curve, which says little or nothing about the economic outlook.

Historically, the yield curve's forecasting record is quite good. Even the late 1966 'failure' cited by Bloomberg wasn't really a failure. All time series show an economic contraction and bear market in 1966. But according to John Williams, president Lyndon Johnson leaned on the Dept. of Commerce to falsify the GDP report, to avoid a politically-unpopular recession designation. Ever since, baffled economists have been fruitlessly tweaking their recession models, trying to get rid of the 'false positive' in 1966, which actually is quite valid. Poor dears! 

But now we're in ZIRP never-never land where, as Saddam Hussein used to say, 'Anything is possible now, my brothers!' [And sisters!] Do not adjust your set --

 

 

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machinehead
Status: Diamond Member (Offline)
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Posts: 1077
Re: Warning from the US Bond

More Bond Bubble Baloney, if you're a Believer:

Aug. 23 (Bloomberg) -- The amount of money flowing into bond funds is poised to exceed the cash that went into stock funds during the Internet bubble, stoking concern fixed-income markets are headed for a fall. 

Investors poured $480.2 billion into mutual funds that focus on debt in the two years ending June, compared with the $496.9 billion received by equity funds from 1999 to 2000, according to data compiled by Bloomberg and the Washington-based Investment Company Institute.

The new cash has helped fuel a rally and drove yields on investment-grade U.S. corporate debt down to a record 3.79 percent last week, while two-year U.S. Treasury yields fell to an all-time low of less than 0.5 percent.

The 10 lowest-yielding U.S. corporate bond deals ever were sold in the past 14 months, according to Deutsche Bank AG, with International Business Machines Corp. issuing $1.5 billion of three-year notes on Aug. 2 with a record-low 1 percent coupon.

http://noir.bloomberg.com/apps/news?pid=20601087&sid=abvRHA9sEMxk&pos=6

Yow -- there's that 1-percent danger-zone redline again! Three-year corporate paper at 1% yield? Makes you wonder whether Usgov's so whacked-out that AAA corporate paper will become the risk-free reference, with guvvies trading at a yawning premium as Boomer Bonus Marchers converge on the Capitol Mall, as the wired youth hoot 'Euthanize, euthanize!'

To commemorate this extraordinary moment, I've updated the Monkees' song I'm A Believer. I know this will remind Yobob of his halcyon days as a Mouseketeer, when he had a hopeless crush on Annette Funicello. ;-)

COUPON BELIEVER

I thought bonds were only cool in fairy tales
Meant for someone else but not for me
What's the use of buyin'?
All you get is change
When I sought not yield
But capital gains

Then I saw 'em race
Now I'm a believer!
Not a trace
Of doubt in my mind

I'm in LOVE (Mmm, mmm!)
I'm a believer
A coupon redeemer
Till I die ...

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